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5 Strategies To Implement As The Retirement Landscape Continues To Change.

As they usually do, the baby-boom generation is having a profound impact on retirement.

In Canada for example, new retirees jumped from 170,000 annually five years ago to 250,000 now.

In five more years, the number will rise to 400,000 annually. In North America over 10,000 people retire every day.

That’s an insane number.

That translates to 1200 people retiring every hour of an eight-hour working day!

Another significant change is in the area of longevity.

In 1950 the average life expectancy was 68. This means that once you reached a retirement age of 65, on average you only lived for another three years. By the year 2000, average life expectancy had risen to 76, and by 2010 life expectancy was age 81. So the average of years in retirement increased from 3 years to 13 years. That's an additional 10 years of income needs.

The fastest-growing age group in North America is between the ages of 60 and 64. In late 2015, stats Canada announced that for the first time there were more Canadians over the age of 65 than under the age of 14.

The facts of aging and longevity will have profound impacts on the retirement landscape over the next several decades.

Over the next few decades, from a demographic standpoint, Canada will experience population shifts that will have far reaching impacts on our society and the financial health of our Nation.

At a national and local level, it’s imperative that a debate take place around these impacts that will lead to the introduction of policies to deal with these issues:

  • Pressure on our health care system

  • Loss of highly skilled workers unless the employment system becomes more accommodating

  • Embracing of immigration from other countries to fuel the employee/worker growth needed in many sectors of the economy

  • Pressure on the pension system

A number of significant risks could affect Canada’s long-term fiscal sustainability, including demographic changes, climate change, and aging infrastructure.

These challenges make it important for the government to understand the budgetary impact of existing policies and policy options on the country’s long-term fiscal position and the sustainability of public finances.

The charts included in this post summarize the result of an analysis of Canada's fiscal situation.

The focus of the analysis was on how the Department of Finance in Canada analyzes and considers long-term fiscal sustainability (which could be affected by demographic changes) in the process of making policy recommendations and how it reports long-term fiscal analyses.

The report confirms that Canada’s population is aging rapidly.

Canadians aged 65 and older now make up 14.4% of the population, compared with 13.3% in 2006. In 40 years, seniors will account for almost a quarter of the country’s population.

This demographic shift could weaken the fiscal position of governments by decreasing participation in the labour force, thus reducing potential economic growth as well as growth in government revenues.

An aging population will also put upward pressure on health care costs and pensions.

In this context, if interest charges on the public debt grow faster than the economy and unless revenues increase or spending levels decrease, the federal government could face an unsustainable budgetary position in the long run.

Statistics Canada Chart Unpacked

The image on the chart is a classic Christmas tree.

You’ll notice a large demographic cohort at the bottom working to provide tax revenues to look after pensions and healthcare for those individuals at the top of the demographic tree. This was the situation back in 1971.

By 2011 the Christmas tree was beginning to take a decidedly different shape. By the year 2051, the demographic shape looks like a cylinder.

The impact is far fewer people at the bottom of the demographic pyramid will be contributing tax dollars toward the financial needs of people at the top of the pyramid who will need pensions and healthcare.

You don’t have to be a rocket scientist to forecast the looming problems retirees will be facing as a result of these massive demographic shifts.

The fiscal squeeze chart (above) is a dramatic example of the potential impact on the future state of government spending as a result of demographic changes.

Economists expect that revenues will plateau and expenditures for healthcare and government pensions will aggressively grow. This analysis was prepared before COVID 19.

It will be an even more concerning chart once the post COVID numbers are included!

To put these spending increases into perspective, when combined, the higher projected government spending related to health care and income support programs for seniors (OAS, etc.) would be equivalent to spending an additional $107 billion on these same programs over and above what governments in Canada spent in 2016.

In response to this dramatic demographic shift, and the resulting higher spending and slower revenue growth, governments across Canada will face stark choices. They will have to reform spending programs, enact policies to improve economic growth, run deficits and accumulate debt, and/or raise tax rates.

If governments—including the federal government—continue to choose deficits and debt, Canada’s net debt-to-GDP ratio (a metric economists use to measure the sustainability of government debt by comparing it to the size of the economy) could increase to between 167% to 252% by 2045.